FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark One)

X QUARTERLY  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 1999

                                  OR

0 TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934

For the transition period from _______ to _________

Commission file number  000-22327


                             PSW TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)


Delaware                                    74-2796054
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
(Address of principal executive offices) (Zip Code)
                                 (512) 343-6666
            Registrant's telephone number, including area code


         Indicate  by check x whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes x No __________


         As of July 31, 1999, the Registrant had outstanding 9,464,890 shares of
Common Stock, $.01 par value.



<PAGE>
<TABLE>
<CAPTION>

                             PSW TECHNOLOGIES, INC.

                        Index to June 30, 1999 Form 10-Q




                                                                                                               Page
                                           Part I -- Financial Information


<S>         <C>                                                                                                <C>

Item 1.     Financial Statements (unaudited) .....................................................................3

            Condensed Balance Sheets -- June 30, 1999 and December 31, 1998.......................................3

            Condensed Statements of Operations -- Three Months and Six Months Ended
            June 30, 1999 and 1998................................................................................4

            Condensed Statements of Cash Flows -- Six Months Ended June 30,
            1999 and 1998.........................................................................................5

            Notes to Condensed Financial Statements...............................................................6

Item 2.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations.........................................................8

Item 3.     Quantitative and Qualitative Disclosures about Market Risks..........................................16


                                            Part II -- Other Information

Item 1.     Legal Proceedings....................................................................................17

Item 2.     Changes in Securities................................................................................17

Item 3.     Defaults upon Senior Securities......................................................................17

Item 4.     Submission of Matters to a Vote of Security Holders..................................................17

Item 5.     Other Information ...................................................................................17

Item 6.     Exhibits and Reports on Form 8-K.....................................................................17

            Signatures...........................................................................................18


</TABLE>

                                       2
<PAGE>
<TABLE>
<CAPTION>

                         Part 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

                             PSW Technologies, Inc.
                            Condensed Balance Sheets
                        (in thousands, except share data)




                                                                     June 30,
                                                                       1999            December 31,
                                                                   (Unaudited)             1998

<S>                                                                      <C>             <C>
Assets
Current assets:
   Cash                                                                  $  780          $ 1,167
   Short-term investments                                                19,351           19,136
   Accounts receivable, net of allowance for doubtful
      accounts of  $325 and $260 at June 30, 1999
      and December 31, 1998, respectively                                 7,630            6,171
   Unbilled revenue under customer contracts                              2,025            1,070
   Income tax receivable                                                   377              896
   Net deferred taxes                                                      334              334
   Prepaid expenses and other current assets                                602              572
                                                                      ---------        ---------
Total current assets                                                     31,099           29,346
Property and equipment, net                                               4,187            4,005
                                                                      ---------        ---------

Total assets                                                           $ 35,286         $ 33,351
                                                                       ========         ========

Liabilities and stockholders' equity
Current liabilities:
   Trade payables                                                           594              460
   Accrued expenses and other current liabilities                         2,690            1,507
                                                                       --------         --------
Total current liabilities                                                 3,284            1,967

Net deferred taxes                                                          316              316

Stockholders' equity:
  Preferred stock, par value $.01 per share, 1,000,000
     shares authorized and none issued and outstanding                        -                -

  Common  stock,  par  value  $.01  per  share,  34,000,000
    shares  authorized, 9,456,878 and 9,293,866 shares
    issued and outstanding at June 30, 1999 and
    December 31, 1998, respectively                                         95               93
  Additional paid-in capital                                             30,110           29,995
  Deferred compensation                                                     (18)             (44)
  Accumulated other comprehensive income                                    (30)             (69)
  Retained earnings                                                       1,529            1,093
                                                                        --------        --------
Total stockholders' equity                                               31,686           31,068
                                                                        --------        --------

Total liabilities and stockholders' equity                             $ 35,286         $ 33,351
                                                                       ========         ========

                             See accompanying notes.
</TABLE>


                                       3
<PAGE>
<TABLE>
<CAPTION>


                             PSW Technologies, Inc.
                       Condensed Statements of Operations
                      (in thousands, except per share data)
                                   (unaudited


                                                          Three Months Ended           Six Months Ended
                                                               June 30,                    June 30,
                                                      --------------------------- ---------------------------
                                                           1999          1998          1999         1998
                                                           ----          ----          ----         ----
<S>                                                       <C>            <C>          <C>          <C>
Revenue                                                   $11,006        $ 9,867      $ 21,401     $ 19,625
Operating expenses:
   Technical staff                                          6,035          5,523        12,105       11,326
   Selling and administrative staff                         2,304          2,759         4,533        5,308
   Other expenses                                           2,440          1,980         4,535        3,906
   Special compensation expense                                 -             38             -           82
                                                         --------       --------       -------      -------
Total operating expenses                                   10,779         10,300        21,173       20,622
                                                         --------       --------       -------      -------

Income (loss) from operations                                 227           (433)         228          (997)

Interest income (expense), net                                237            223           488          475
                                                          ---------      -------       -------      -------
Income (loss) before provision (benefit) for
   income taxes                                               464           (210)           716        (522)
                                                          --------       -------       -------      -------

Provision (benefit) for income taxes                          180              -           280        (100)
                                                          --------       -------       -------      -------

Net income (loss)                                          $  284        $  (210)        $ 436      $ (422)
                                                          ========      ========       =======      =======

Basic earnings (loss) per share                            $ 0.03       $ (0.02)       $  0.05      $(0.05)
                                                          ========      ========       =======      =======

Diluted earnings (loss) per share                          $ 0.03       $ (0.02)       $  0.04      $(0.05)
                                                          ========      ========       =======      =======

Shares used in basic earnings (loss) per share
   calculation                                              9,414          9,057         9,369        9,023
                                                          ========      ========       =======      =======

Shares used in diluted earnings (loss) per share
   calculation                                             10,202          9,057        10,216        9,023
                                                          ========      ========       =======      =======


                                             See accompanying notes.
</TABLE>


                                       4
<PAGE>
<TABLE>
<CAPTION>


                             PSW Technologies, Inc.
                       Condensed Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)



                                                                                    Six Months
                                                                                  Ended June 30,
                                                                       -------------------------------------
                                                                             1999              1998
<S>                                                                          <C>                <C>
Operating activities
Net income                                                                   $  436             $ (422)
Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
     Special compensation                                                         -                 82
     Depreciation and amortization                                              667                491
     Bad debt expense                                                            15                 20
     Changes in operating assets and liabilities:
        Accounts receivable                                                  (1,474)               707
        Unbilled revenue under customer contracts                              (955)              (446)
        Prepaid expenses and other current assets                               (30)              (178)
        Income tax receivable                                                   520               (321)
        Trade payables                                                          162                191
        Accrued expenses and other current liabilities                        1,192               (719)
                                                                             -------             ------
Net cash provided by (used in) operating activities                             533               (595)
                                                                             -------             ------

Investing activities
Purchase securities                                                            (176)                 -
Proceeds from sale of short term investments                                      -              1,549
Acquisition of property and equipment                                          (886)              (829)
                                                                             -------             ------
Net cash provided by (used in) investing activities                          (1,062)               720
                                                                             -------             ------
Financing activities
Issuance of common stock                                                        142                361
                                                                             -------              -----
Net cash provided by financing activities                                       142                361
                                                                             -------              -----

Net increase (decrease) in cash                                                (387)               486
Cash, beginning of period                                                     1,167                835
                                                                             -------              -----

Cash, end of period                                                           $ 780             $ 1,321
                                                                             =======            =======

Non-cash activities:
Unrealized gain on investments                                                $  39              $  37
Reduction of income taxes payable associated with the
   exercise of stock options                                                  $   1              $  87
</TABLE>



                                       See accompanying notes.




                                       5
<PAGE>

                             PSW Technologies, Inc.
                     Notes to Condensed Financial Statements
                                  June 30, 1999
                                   (unaudited)

1.       Basis of Presentation

PSW  Technologies,  Inc.  (the  "Company")  commenced  operations as a separate,
stand-alone  corporation  effective October 1, 1996. The accompanying  unaudited
financial statements have been prepared by the Company pursuant to the rules and
regulations  of the  Securities and Exchange  Commission  (the "SEC")  regarding
interim  financial  reporting.   Accordingly,   they  do  not  include  all  the
information and notes required by generally accepted  accounting  principles for
complete  financial  statements  and  should  be read in  conjunction  with  the
financial  statements  and notes  thereto for the year ended  December  31, 1998
included in the Company's annual report on Form 10-K. The accompanying financial
statements reflect  adjustments,  all of which are of a normal recurring nature,
which are, in the opinion of management,  necessary for a fair presentation. The
results for interim periods are not necessarily indicative of full year results.

2.       Significant Accounting Policies

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
could affect the financial  statements and  accompanying  notes.  Actual results
could differ from those estimates.

3.       Comprehensive Income

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income.  SFAS No. 130  establishes  new rules for the  reporting  and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholders'  equity. SFAS No. 130
requires  unrealized  gains  or  losses  on  the  Company's   available-for-sale
securities,  which prior to adoption were reported  separately in  shareholders'
equity, to be included in other comprehensive income.


The  components of  comprehensive  income for the three and six months
ended June 30, 1999 and 1998 are as follows:


<TABLE>
<CAPTION>
                                                          Three months ended              Six months ended
                                                               June 30,                       June 30,
                                                         1999            1998            1999         1998
                                                      -----------     -----------       --------    ----------
<S>                                                         <C>            <C>             <C>         <C>
Net income (loss)                                           $284           $(210)          $436        $(422)

Unrealized gain (loss) on short term
  investments                                                (85)             (2)           66            37
Income tax expense (benefit) related to items
  of other comprehensive income                              (33)             -             27             7


                                                      -----------     -----------       --------    ----------
Comprehensive income (loss)                                 $232           $(212)         $475          $(392)
                                                      ===========     ===========       ========    ==========

</TABLE>





                                       6
<PAGE>



                             PSW Technologies, Inc.
               Notes to Condensed Financial Statements (Continued)
                                   (unaudited)

The components of accumulated other  comprehensive  income at June 30,
1999 and December 31, 1998 are as follows:

<TABLE>
<CAPTION>

                                                                                           1999              1998
                                                                                        ------------     -------------
<S>                                                                                           <C>                <C>

Unrealized loss on short term investments                                                     $(30)              $(69)
                                                                                        ============     =============
</TABLE>


4.       Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share (in thousands,  except per share data) for the three months and six months
ended June 30:

<TABLE>
<CAPTION>

                                                          Three Months Ended                      Six Months Ended
                                                               June 30,                               June 30,
                                                       1999                1998               1999              1998



                                                  --------------      --------------    ---------------    --------------
<S>                                                       <C>               <C>                  <C>             <C>
Numerator:
  Net income (loss)                                       $  284            $  (210)             $  436          $  (422)
                                                   ==============      ==============    ===============    ==============

Denominator:
  Shares used in basic earnings (loss) per
    share calculation                                      9,414               9,057              9,369             9,023

  Effect of dilutive securities:
    Employee stock options                                   328                   -                376                 -
    Warrants                                                 460                   -                471                 -
                                                   --------------      --------------    ---------------    --------------
  Shares used in diluted earnings (loss) per
    share calculation                                     10,202               9,057             10,216             9,023
                                                   ==============      ==============    ===============    ==============

Basic earnings (loss) per share                         $   0.03           $  (0.02)           $   0.05         $  (0.05)
                                                   ==============      ==============    ===============    ==============

Diluted earnings (loss) per share                       $   0.03           $  (0.02)           $   0.04         $  (0.05)
                                                   ==============      ==============    ===============    ==============

</TABLE>


Options to purchase 1.74 million  shares of Common Stock at an average  exercise
price of $2.73 per share were  outstanding  at  December  31,  1998 but were not
included in the  computation  of diluted  loss per share as its effect  would be
anti-dilutive.




                                       7
<PAGE>








Item 2.

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS

The discussion and analysis below contains  forward-looking  statements,  within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange Act of 1934, that involve risks and uncertainties,  such as
statements for the plans,  objectives,  expectations and intentions of PSW. Such
forward  looking  statements are generally  accompanied by words such as "plan,"
"estimate," "expect," "believe," "could," "would," "anticipate," "may," or other
words  that   convey   uncertainty   of  future   events  or   outcomes.   These
forward-looking  statements and other  statements  made elsewhere in this report
are made in reliance on the Private  Securities  Litigation  Reform Act of 1995.
The section below  entitled  "Certain  Factors That May Affect  Future  Results,
Financial  Condition and Market Price of Securities"  sets forth certain factors
that could cause actual future results of the Company to differ  materially from
these statements.

Overview

PSW  Technologies,  Inc.  (the  "Company"),  is a  software  services  firm that
provides high value  solutions to information  technology  ("IT") vendors and IT
users by mastering and applying  critical emerging  technologies,  including Web
based distributed  computing,  object oriented  development,  advanced operating
systems and systems  management  technologies.  IT vendors  primarily consist of
software  companies  who  utilize  the  Company's  services  to help bring their
products to market faster. IT users generally utilize the Company's  services to
help  define,  develop and  complete  high value,  mission  critical  enterprise
software systems for internal use. PSW provides joint project-based development,
porting  and testing  services  to  selected  IT vendor  clients and applies the
technical expertise learned to the design and development of high value, mission
critical enterprise business systems for its IT user clients.

To  date,  revenue  has  been  generated  principally  from   time-and-materials
contracts for the Company's software services.  Revenue from  time-and-materials
contracts is  recognized  during the period in which the services are  provided.
The Company also enters into fixed price  contracts  for its software  services.
Revenue    from   fixed    price    contracts    is    recognized    using   the
percentage-of-completion  method over the term of the client contract,  measured
by the labor  incurred  as a  percentage  of the  estimated  total labor used at
completion.  The  cumulative  impact of revisions in  percentage  of  completion
estimates is reflected in the period in which the revisions are made. Provisions
for estimated losses on uncompleted contracts are made on a contract-by-contract
basis and are  recognized  in the  period in which such  losses are  determined.
There  can  be no  assurance  of  the  accuracy  of the  Company's  future  work
completion  estimates,  and  operating  results  may be  adversely  affected  by
inaccurate estimates of contract related labor.




                                       8
<PAGE>




Results of Operations

The  following  table sets  forth the  percentage  of  revenue of certain  items
included in the  Company's  condensed  statement  of  operations  for the period
indicated:

<TABLE>
<CAPTION>
                                                      Three Months                       Six Months
                                                     ended June 30,                     ended June 30,
                                                     1999       1998                    1999       1998

<S>                                                  <C>        <C>                     <C>        <C>
Revenue............................................  100%       100%                    100%       100%
Operating expenses:
   Technical staff.................................   55         56                       57        58
   Selling and administrative staff................   21         28                       21        27
   Other expenses..................................   22         20                       21        20
   Special compensation expense....................    -          -                       -          -
                                                     ----      ----                     ----      ----
Total operating expense...........................    98        104                       99       105
                                                     ----      ----                     ----      ----
Income (loss) from operations.....................     2         (4)                       1        (5)
Interest income (expense), net....................     2          2                        2         2
Provision (benefit) from income taxes....              1          -                        1        (1)
                                                     ----       ----                    ----      ----
Net income (loss).................................     3%        (2)%                      2%       (2)%
                                                     ====       ====                    ====      ====
</TABLE>

First Six Months of 1999 Compared with First Six Months of 1998

The following discussion of operations and trends also relates to the comparison
of the three month  period ended June 30, 1999 with the three month period ended
June 30, 1998.

Revenue

The Company's revenue consists primarily of fees for software services provided.
Revenue  was $21.4  million  in the first six  months of 1999,  up 9% from $19.6
million for the first six months of 1998,  principally  due to the growth in our
end-user  revenue and higher  average  revenue per client  offset  slightly by a
decline in the number of clients  served  during the six month  period.  Revenue
attributable to software  services  rendered to IT vendors was $13.4 million and
$12.7  million  in the first six  months of 1999 and in the first six  months of
1998,  respectively,  an increase of 6% in the first six months of 1999 over the
first six months of 1998. Revenue  attributable to software services rendered to
IT users was $8.0  million and $6.9 million for the first six months of 1999 and
the first six months of 1998, respectively,  an increase of 16% in the first six
months of 1999 over the first six months of 1998.

IBM,  including  its wholly  owned  subsidiaries,  accounted  for 33% and 36% of
revenue in each of the first six months of 1999 and 1998, respectively.  Another
client  accounted  for 12% of revenue for the first six months of 1999. No other
client accounted for more than 10% of revenue for either period.

Technical Staff

Technical staff expenses consist of the cost of salaries,  payroll taxes, health
insurance and workers'  compensation  for technical staff personnel  assigned to
client  projects and  unassigned  technical  staff  personnel,  and fees paid to
subcontractors for work performed in connection with a client project. Technical
staff  expenses  were $12.1 million in the first six months of 1999, an increase
of 7% over $11.3  million  for the first six  months of 1998.  The  increase  in
technical  staff  expenses was primarily due to higher average  salaries  offset
slightly by a lower  headcount.  Technical  staff  expenses  decreased to 57% of
revenue  in the  first six  months  of 1999 from 58% in the first six  months of
1998, primarily as a result of higher revenue.

                                       9
<PAGE>

Selling and Administrative Staff

Selling  and  administrative  staff  expenses  consist of the cost of  salaries,
payroll  taxes,  health  insurance  and  workers'  compensation  for selling and
administrative   personnel,   all   commissions   and   bonuses.   Selling   and
administrative staff expenses were $4.5 million in the first six months of 1999,
a  decrease  of 15% from  $5.3  million  in the first  six  months of 1998.  The
decrease in selling and  administrative  staff expenses was primarily due to the
higher  efficiency  which resulted from hiring a dedicated sales staff.  Selling
and administrative staff expenses were 21% of revenue in the first six months of
1999 compared to 27% of revenue in the first six months of 1998,  primarily as a
result of increases in revenue and less technical staff involvement in sales.

Other Expenses

Other expenses consist of all non-staff  related costs, such as occupancy costs,
travel,  business  insurance,  business  development,  recruiting,  training and
depreciation.  Other expenses were $4.5 million in the first six months of 1999,
an  increase  of 16%  from  $3.9  million  in the  first  six  months  of  1998,
principally  due to facility  additions and higher  recruiting and travel costs.
Other  expenses  were 21% of revenue in the first six months of 1999 compared to
20% in the first six months of 1998.

Special Compensation Expense

Special compensation expense consists of stock-based  compensation in connection
with  the  grants  of  replacement   options  to  the  Company's  employees  who
participated  in the Pencom  Systems  Incorporated  stock option  plan.  Special
compensation  expense was $82,000,  or less than 1% of revenue, in the first six
months of 1998.

Income (Loss) from Operations

The Company  recorded income from operations of $228,000 in the first six months
of 1999,  an  increase  from a loss of  operations  of $997,000 in the first six
months of 1998. Income from operations was 1% of revenue in the first six months
of 1999, an increase  from a loss from  operations of 5% of revenue in the first
six months of 1998.

Income Taxes

The  provision  for income  taxes of $280,000  for the six months ended June 30,
1999, is computed  using an estimated  annual  effective tax rate of 39%,  which
differs  from the federal  statutory  rate of 34% as a result of state taxes and
permanent  differences for  non-deductible  portions of meals and  entertainment
expenses included in other expenses.

The benefit for income taxes of $100,000 for the six months ended June 30, 1998,
is computed using an estimated  annual  effective tax rate of 19%, which differs
from the federal statutory rate of 34% as a result of state taxes and tax-exempt
income.

Net Income (Loss)

Net  income  was  $436,000  in the  first  six  months  of 1999 and net loss was
$422,000  in the first six  months of 1998.  Net income was 2% of revenue in the
first six  months of 1999 and net loss was 2% of revenue in the first six months
of 1998.


                                       10
<PAGE>




Liquidity and Capital Resources

At June 30, 1999, the Company had cash and short term investments totaling $20.1
million,  a decrease  from $20.3  million at December 31,  1998,  primarily as a
result of funding working capital requirements.

The Company  anticipates that its existing capital  resources and potential cash
flows from operations will be adequate to fund the Company's working capital and
capital expenditure  requirements for at least the next 12 months.  There can be
no assurance  that changes will not occur that would consume  available  capital
resources  before  such  time.  The  Company's  capital  requirements  depend on
numerous factors, including potential acquisitions, the timing of the receipt of
accounts receivable, employee growth and the percentage of projects performed at
the Company's facilities.  There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all.

Year 2000 Compliance

Many older computer systems and software products  currently in use are coded to
accept  only two digit  entries in the date code  field.  These date code fields
will need to accept four digit  entries to  distinguish  21st century dates from
20th century dates. As a result,  computer  systems and/or software used by many
companies will need to be upgraded to comply with such "Year 2000" requirements.

All of the  services  currently  offered by the Company are  designed to be Year
2000 compliant.  However, the Company's services are often integrated or used in
conjunction with third-party software;  such software may not be compatible with
the Company's services or Year 2000 compliant.  The Company may in the future be
subject  to claims  based on Year 2000  problems  in  other's  products,  custom
scripts  created by third parties to interface  with the  Company's  services or
issues arising from the  integration of multiple  products and systems within an
overall system. The costs of defending and resolving Year 2000-related disputes,
and any  liability  of the  Company  for Year  2000-related  damages,  including
consequential  damages,  could have a material  adverse  effect on the Company's
business, operating results and financial condition.

Over the past three years,  the Company has made Year 2000 compliance a priority
in IT purchasing and installation decisions.  The Company's internal information
technology  group has  adopted  a Year 2000  compliance  program  to assess  and
address any Year 2000 issues which remain related to the Company's IT and non-IT
systems.  The program  consists of the following  phases:  identifying Year 2000
application  issues,  updating  applications,  identifying Year 2000 systems and
operating  systems  issues,  collecting  manufacturer's  compliance  statements,
verifying  solutions to Year 2000 issues (such  phases are  complete),  updating
firmware and phasing out  unsupported  hardware,  and updating  and/or  patching
operating systems,  (such phases are in process and scheduled to be completed in
the third  quarter of fiscal  1999).  As of July 1, 1999,  the Company has spent
approximately  $29,000  of the  currently  estimated  $45,000  total cost of the
program.  Costs  incurred and expected to be incurred  consist  primarily of the
cost of Company  personnel  involved  in  updating  applications  and  operating
systems  and the  costs of  software  updates  and  patches  (many of which  are
provided  free of charge from the vendors).  Funds for the Year 2000  compliance
program are expected to be provided from available working capital.  The Company
has utilized the Company's internal technical personnel, and intends to continue
to use such  personnel,  to address Year 2000 issues,  rather than contract with
third-party consultants.

The  Company  has  completed  its  survey of third  parties  with which it has a
material  relationship  and it appears that the supply chain has competent  Year
2000 plans in place. The majority of the Company's  customers are  sophisticated
IT  vendors  and users who are  addressing  their own Year 2000  issues  and the
Company relies primarily on its own technical personnel and internal IT systems,
rather  than third  party  suppliers.  The  Company  has not  formulated  a most
reasonably likely worst case scenario or formulated a contingency plan.

Significant  uncertainty still exists as to the global  implications of the Year
2000 issue. The Company  believes that the purchasing  patterns of customers and
potential  customers  may be affected by Year 2000



                                       11
<PAGE>



issues in a variety of ways. Many companies (including customers of the Company,
and customers or potential  customers of the Company's  customers) are expending
significant  resources to correct or patch their  current  hardware and software
systems for Year 2000 compliance.  Such expenditures may result in reduced funds
available for the Company's customers to pursue product development  programs or
IT systems  enhancements  for which the Company's  services  would  otherwise be
utilized. Any of the foregoing,  including costs of defending and resolving Year
2000-related  disputes,   reductions  in  development  programs  or  IT  systems
enhancements  by customers and their  customers or the failure of the Company to
adequately  resolve  internal  Year 2000  compliance  issues  could  result in a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

Certain Factors That May Affect Future Results, Financial Condition
   and Market Price of Securities

         Industry  Concentration;  Dependence on Large Projects. The Company has
derived and  believes it will  continue to derive a  significant  portion of its
revenue  from  the  technology  vendor  industry.  As a  result,  the  Company's
business,  financial  condition  and results of  operations  are  influenced  by
economic  and  other  conditions  affecting  such  industry,  such  as  economic
downturns  which could lead to a reduction in spending on IT projects,  which in
turn could lead to fewer new research and development outsourcing projects being
undertaken. Further, several of the Company's client contracts limit its ability
to provide  services to competitors  of such clients,  thereby  restricting  the
field of  potential  future  clients.  In  addition,  as a result of the dynamic
nature  of the IT vendor  industry,  the  Company  may lose  clients  due to the
acquisition, merger or consolidation of existing clients with entities which are
not current clients of the Company. The occurrence of any of the foregoing could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Fixed-Price  Contracts  and Other  Project  Risks.  During 1998 and the
first  six  months  of 1999,  approximately  16% and 20%,  respectively,  of the
Company's  revenue  was  generated  on a  fixed  price,  fixed-delivery-schedule
("fixed price") basis, rather than on a time-and-materials  basis. The Company's
failure to accurately  estimate the resources required for a fixed price project
or its  failure to  complete  its  contractual  obligations  in a timely  manner
consistent  with the project  plan upon which its fixed price  contract is based
could  have a  material  adverse  effect on the  Company's  business,  financial
condition  and  results of  operations.  In the past,  the  Company has found it
necessary to revise project plans after  commencement  of the project and commit
unanticipated  additional  resources to complete  certain  projects,  which have
negatively  affected  the  profitability  of  such  projects.  The  Company  may
experience similar situations in the future, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company may establish contract prices before the project design
specifications are finalized, which could result in a fixed price that proves to
be too low and therefore  adversely  affects the Company's  business,  financial
condition and results of operations.

Many of the Company's  engagements  involve  projects  which are critical to the
operations of its clients'  businesses  and which  provide  benefits that may be
difficult to quantify.  The Company's failure to meet a client's expectations in
the  performance  of its services  could  damage the  Company's  reputation  and
adversely  affect its ability to attract new  business,  and may have a material
adverse effect upon its business, financial condition and results of operations.
The Company has undertaken,  and may in the future undertake,  projects in which
the Company guarantees  performance based upon defined operating  specifications
or guaranteed  delivery dates. The Company has also undertaken projects in which
a material  portion  of total  revenue is earned  based upon  meeting  specified
delivery  dates.  Unsatisfactory  performance or  unanticipated  difficulties or
delays in completing  such projects may result in client  dissatisfaction  and a
reduction  in payment  to, or payment of damages by, the  Company,  any of which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.  There can be no assurance that the Company
will be able to limit its liability to clients, including liability arising from
the  Company's  failure to meet  clients'  expectations  in the  performance  of
services, through contractual provisions, insurance or otherwise.

                                       12
<PAGE>


         Management  of Growth.  The  Company's  growth  has placed  significant
demands on its  management  and other  resources.  In order to manage its growth
effectively,  the  Company  will need to  continue  to develop  and  improve its
operational,  financial  and other  internal  systems,  as well as its  business
development  capabilities,  and to continue to attract,  train, retain, motivate
and manage its employees.  In addition, the Company's future success will depend
in large part on its  ability to  continue  to  maintain  high rates of employee
utilization, set fixed price fees accurately,  maintain project quality and meet
delivery  dates,  all as the Company seeks to increase the number of projects in
which it is engaged.  If the Company is unable to manage its growth and projects
effectively,  such inability would have a material adverse effect on the quality
of the Company's services, its ability to retain key personnel and its business,
financial  condition and results of  operations.  No assurance can be given that
the  Company's  growth will  continue to be achieved,  or if  achieved,  will be
maintained or that the Company will be successful in managing any such growth.

         Variability of Quarterly  Operating  Results.  The Company's  quarterly
revenue,  expenses and operating  results have varied  significantly in the past
and are likely to vary significantly from quarter to quarter in the future. Such
quarterly  fluctuations are based on a number of factors,  including the number,
size and scope of  projects in which the  Company is  engaged,  the  contractual
terms and  degree  of  completion  of such  projects,  any  delays  incurred  in
connection  with a project,  the Company's  success in earning  bonuses or other
contingent  payments,  employee  hiring and utilization  rates,  the adequacy of
provisions  for losses,  the  accuracy of  estimates  of  resources  required to
complete ongoing projects and general economic  conditions.  Other factors which
may effect  operating  results  include  customer  budget  cycles  and  customer
spending priorities such as the Year 2000 compliance issue. A high percentage of
the Company's operating expenses,  particularly personnel and rent, are fixed in
advance of any particular quarter. For example, while the number of professional
staff the  Company  employs may be adjusted  to reflect  active  projects,  such
adjustments  take time and the  Company  must  maintain a  sufficient  number of
senior  professionals  to oversee  existing  client  engagements and to focus on
securing new client engagements.  As a result,  unanticipated  variations in the
number or progress  toward  completion of the Company's  projects or in employee
utilization rates may cause  significant  variations in operating results in any
particular  quarter  and  could  result  in  adverse  changes  to the  Company's
business,  financial  condition  and results of  operations.  Any  shortfall  in
revenue or earnings from expected levels or other failures to meet  expectations
of securities  analysts or the market in general regarding results of operations
could have an immediate and material  adverse  effect on the market price of the
Company's Common Stock. Given the possibility of such quarterly  fluctuations in
revenue or earnings,  the Company  believes  that  comparisons  of its quarterly
results of operations are not  necessarily  meaningful and that such results for
one quarter should not be relied upon as an indication of future performance.

         Need to Attract and Retain  Professional  Staff. The Company's  success
depends in large part upon its ability to attract,  train, retain,  motivate and
manage highly skilled employees,  particularly project managers and other senior
technical  personnel.  Significant  competition  exists for  employees  with the
skills required to perform the services offered by the Company,  and the Company
requires that a significant  number of such employees  travel to client sites to
perform services on its behalf,  which may make a position with the Company less
attractive  to  potential  employees.   Qualified  project  managers,   software
architects  and senior  technical  and  professional  staff are in great  demand
worldwide  and are  likely  to  remain a limited  resource  for the  foreseeable
future.  Furthermore,  there is a high rate of attrition  among such  personnel.
There can be no assurance that a sufficient  number of highly skilled  employees
will continue to be available to the Company,  that potential  employees will be
willing to travel to client  sites,  or that the Company will be  successful  in
training,  retaining and motivating  current or future employees.  The Company's
inability  to  attract,  train and retain  skilled  employees  or the  Company's
employees'  inability to achieve expected levels of performance could impair the
Company's  ability to adequately  manage and staff its existing  projects and to
bid for or obtain new  projects,  which in turn  would  have a material  adverse
effect on the Company's business, financial condition and results of operations.


                                       13
<PAGE>




         Rapid Technological  Advances; Risk of Targeting Emerging Technologies.
The Company has derived,  and will continue to derive, a substantial  portion of
its revenue from  projects  based on  client/server  and internet  systems.  The
client/server  and  internet  systems  market is  continuing  to develop  and is
subject to rapid  technological  change.  The Company's future success will also
depend in part on its  ability  to  develop  IT  solutions  which keep pace with
continuing  changes in  information  processing  technology,  evolving  industry
standards and changing  client  preferences.  There can be no assurance that the
Company will be successful in addressing  these  developments in a timely manner
or that, if addressed,  the Company will be successful in the  marketplace.  The
Company's delay or failure to address these  developments  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. In addition, there can be no assurance that products or technologies
developed,  or services offered,  by third parties will not render the Company's
services noncompetitive or obsolete. The Company's Software Technology Unit also
seeks to identify  emerging  technologies  which it believes  will  develop into
critical technologies with broad application and longevity. Once identified, the
Company may commit  substantial  resources to provide services to the developers
of such technologies. No assurance can be given that the technologies identified
by the Company will develop into critical  technologies  with broad  application
and  longevity.  The failure of the Company to align  itself with such  critical
emerging  technologies  would have a material  adverse  affect on its  business,
financial condition and results of operations.

         Changes  in Senior  Management.  The  Company  has  recently  announced
several additions and changes in its senior management team. The Company's Chief
Executive  Officer,  Timothy D. Webb, joined the Company during 1998 and John M.
Velasquez,  Vice President of Enterprise Solutions, and Pedro A. Fernandez, Vice
President of Corporate  Strategy and  Marketing  joined the Company in the first
quarter of 1999.  With recently  named Vice  President of Software  Research and
Development  Solutions,  Kenneth L.  Drake and the Vice  President  of  Embedded
Systems  Solutions,  Brent  R.  Terry,  the  above  team  comprises  the  senior
management for  operations.  There can be no assurances that such changes in the
senior management of the Company will not adversely affect the Company's results
of operations  or financial  condition,  that the new members of the  management
team will  succeed in their roles in a timely or  efficient  manner or that they
will be  satisfactorily  assimilated,  or that  new  and  additional  management
responsibilities can be allocated effectively among such executives.  Failure by
the Company to assimilate new  executives,  or the failure of any such executive
to perform  effectively,  could have a material  adverse effect on the Company's
business, financial condition and results of operations.

         Dependence on Key Personnel.  The Company's  future success will depend
in part upon the  continued  services of a number of key  management  employees,
particularly  Timothy D. Webb,  Keith D.  Thatcher,  Kenneth L. Drake,  Pedro A.
Fernandez,  John M. Velasquez and Brent R. Terry,  and a number of key technical
employees.  The loss of the services of any of the Company's key personnel could
have a material adverse effect on the Company's  business,  financial  condition
and  results of  operations.  The  Company  does not  maintain  key-person  life
insurance on any of its employees.  In addition, if one or more of the Company's
key  employees  resigns  from  the  Company  to join a  competitor  or to form a
competing  company,  any resulting loss of existing or potential  clients to any
such competitor could have a material adverse effect on the Company's  business,
financial  condition and results of operations.  In the event of the loss of any
such  personnel,  there can be no  assurance  that the Company  would be able to
prevent the unauthorized disclosure or use of its technical knowledge, practices
or procedures by such personnel.

         System  Interruption and Security Risks.  The Company's  operations are
dependent on its ability to protect its  intranet  from  interruption  by damage
from  telecommunications  failure,  fire, earthquake,  power loss,  unauthorized
entry or other  events  beyond  the  Company's  control.  Most of the  Company's
computer equipment,  including its processing equipment, is currently located at
a single site.  There can be no assurance that  unanticipated  problems will not
cause any significant  system outage or data loss. Despite the implementation of
security  measures,  the  Company's  infrastructure  may also be  vulnerable  to
computer  viruses,  hackers or similar  disruptive  problems  caused by Internet
users.  Persistent problems continue to affect public and private data networks.
For example,  it is common for Internet service  providers to experience  system
interruptions which cause the Company to lose access to the Internet,  the means
by which the Company posts  internal  information  and provides  e-mail and time
sheet query and entry.  Any damage or failure that causes


                                       14
<PAGE>

interruptions  in the Company's  operations could have a material adverse effect
on the Company's business, financial condition and results of operations.

         Effect of  Certain  Antitakeover  Provisions.  The  Company's  Board of
Directors has the authority to issue shares of Preferred  Stock and to determine
the designations,  preferences and rights and the qualifications or restrictions
of those  shares  without any further  vote or action by the  stockholders.  The
rights of the holders of Common  Stock will be subject to, and may be  adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future.  The issuance of Preferred  Stock could have the effect of making
it more  difficult  for a third party to acquire a majority  of the  outstanding
voting  stock of the  Company.  In  addition,  the  Company  is  subject  to the
antitakeover  provisions of Section 203 of the Delaware General  Corporation Law
(the  "DGCL").  In general,  this  statute  prohibits a publicly  held  Delaware
corporation  from  engaging  in a  "business  combination"  with an  "interested
stockholder"  for a period of three years after the date of the  transaction  in
which  the  person  became  an  interested  stockholder,   unless  the  business
combination  is approved in a  prescribed  manner.  Furthermore,  certain  other
provisions of the Company's  Amended and Restated  Certificate of  Incorporation
and Amended and Restated Bylaws may have the effect of discouraging, delaying or
preventing a merger, tender offer or proxy contest, which could adversely affect
the market price of the Company's Common Stock.

         Uncertainty  Related  to the Year 2000  Compliance  Issues.  Many older
computer systems and software products currently in use are coded to accept only
two digit  entries in the date code  field.  These date code fields will need to
accept four digit  entries to  distinguish  21st century dates from 20th century
dates. As a result,  in less than nine months,  computer systems and/or software
used by many  companies will need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty still exists as to the global implications
of the Year 2000 issue.  The Company  believes that the  purchasing  patterns of
customers  and  potential  customers  may be  affected  by Year 2000 issues in a
variety  of ways.  Many  companies  (including  customers  of the  Company,  and
customers  or potential  customers of the  Company's  customers)  are  expending
significant  resources to correct or patch their  current  hardware and software
systems for Year 2000 compliance.  Such expenditures may result in reduced funds
available for the Company's customers to pursue product development  programs or
IT systems  enhancements  for which the Company's  services  would  otherwise be
utilized. Any of the foregoing,  including costs of defending and resolving Year
2000-related  disputes,   reductions  in  development  programs  or  IT  systems
enhancements  by customers and their  customers or the failure of the Company to
adequately  resolve  internal  Year 2000  compliance  issues  could  result in a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.


















                                       15
<PAGE>










Item 3.  Quantitative and Qualitative Disclosures about Market Risks

         The  Company  does  not use  derivative  financial  instruments  in its
non-trading  investment  portfolio.   The  Company  places  its  investments  in
instruments  that  meet high  credit  quality  standards,  as  specified  by the
Company's investment policy.

         The Company is exposed to cash flow and fair value risk from changes in
interest rates, which may affect its financial  position,  results of operations
and  cash  flows.   In  seeking  to  minimize  the  risks  from   interest  rate
fluctuations,  the Company manages exposures  through ongoing  evaluation of its
investment portfolio. The Company does not use financial instruments for trading
or other speculative purposes.

         The table below provides  information  about the Company's  non-trading
investment portfolio.  For investment  securities,  the table presents principal
cash  flows and  related  weighted  average  fixed  interest  rates by  expected
maturity dates.

<TABLE>
<CAPTION>

                                                     Investments
                                                       Maturing          Weighted           Fair Value
                                                        Before            Average               At
               At June 30, 1999                        June 30,          Interest            June 30,
    (in thousands, except interest rates)                2000              Rate                1999
-----------------------------------------------    -----------------    ------------    -------------------
<S>                                                       <C>                <C>               <C>

Money market funds                                         $  5,290           4.74%              $   5,290
Government issues                                             4,173           4.80%                  4,175
Corporate issues                                              7,900           6.22%                  9,886
                                                   =================    ============    ===================
                                                          $  17,363           5.43%             $   19,351
                                                   =================    ============    ===================


                                                     Investments         Weighted           Fair Value
                                                       Maturing           Average               At
             At December 31, 1998                       During           Interest          December 31,
    (in thousands, except interest rates)                1999              Rate                1998
-----------------------------------------------    -----------------    ------------    -------------------

Money market funds                                         $  1,571           4.70%              $   1,571
Government issues                                             2,723           4.79%                  2,710
Corporate issues                                             13,411           5.42%                 13,234
Commercial paper                                              1,635           5.14%                  1,621
                                                   =================    ============    ===================
                                                          $  19,340           5.25%             $   19,136
                                                   =================    ============    ===================


</TABLE>














                                       16
<PAGE>





                          PART II -- OTHER INFORMATION


Item 1.   Legal Proceedings

          The Company is not a party to any material legal proceedings.

Item 2.   Changes in Securities

          From April 1 through June 30, 1999, the Company  issued  approximately
          9,500  shares of its  common  stock  pursuant  to  exercises  of stock
          purchase  warrants issued in connection with the transfer of assets to
          the Company from Pencom  Systems  Incorporated  in October  1996.  The
          warrants have an exercise price of $0.04 per share. The issuances were
          deemed exempt from registration  under Section 5 of the Securities Act
          of 1933 in reliance  upon Section 4(2) thereof or Rule 701  thereunder
          and appropriate restrictive transfer legends were affixed to the share
          certificates issued in such transaction.

Item 3.   Defaults Upon Senior Securities

          None.

Item 4.   Submission of Matters to a Vote of Security Holders

          At the Company's  Annual Meeting of Stockholders  held on May 17,
          1999,  the  following  proposals  were  adopted by the vote  specified
          below.

<TABLE>
<CAPTION>

                                                                                AGAINST OR
                                                                 FOR             WITHHELD           ABSTAIN
                                                             ------------    ------------------   -------------
          1.      Election  of  Seven   Directors  All  directors   proposed  by
                  Management were elected.
<S>                <C>                                         <C>                     <C>                  <C>

                   Edward C. Ateyeh, Jr.                       8,533,558               361,835               -
                   Thomas A. Herring                           8,538,789               356,604               -
                   W. Frank King, Ph.D.                        8,533,625               361,768               -
                   Kevin B. Kurtzman                           8,536,789               358,604               -
                   Michael J. Maples                           8,536,789               358,604               -
                   Wade E. Saadi                               8,533,558               361,835               -
                   Timothy D. Webb                             8,538,450               356,943               -

          2.      Approval of an amendment to 1996             6,045,033               580,518          12,500
                  Stock  Option/Stock  Issuance  Plan to
                  increase  the number of shares of
                  Common Stock available for
                  issuance  thereunder from 2,715,000
                  to 3,215,000

          3.      Ratification of Ernst & Young LLP            8,874,432                 4,866          16,095
                  as independent auditors
</TABLE>

Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (a)Exhibits

Number            Description

27.1                       Financial Data Schedule
---------

          (b) Reports on Form 8-K

                None.

                                       17
<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                        PSW TECHNOLOGIES, INC.
                                        (Registrant)



Date:  August 16, 1999                  /s/ Timothy D. Webb_____________________

                                        Timothy D. Webb
                                        President and Chief Executive Officer
                                        (Principal Executive Officer)





Date:  August 16, 1999                  /s/ Keith D. Thatcher___________________

                                        Keith D. Thatcher
                                        Vice President of Finance, Treasurer and
                                        Chief Financial Officer
                                        (Principal Financial Officer)



Date:  August 16, 1999                  /s/ Kasaundra L. Smith__________________

                                        Kasaundra L. Smith
                                        Controller
                                        (Principal Accounting Officer)